How much are you being ripped off?

The average legacy LTCI policyholder is being ripped off.

By how much?

The Book of Business is the primary determinant of your current and potential loss. We use data found in rate filings to calculate average and aggregate loss per policyholder.

The term Economic Harm Modeling (EHM) was first introduced in the Skochin v. Genworth settlement discussion. EHM identifies policyholder loss exposure as result of the industry’s pricing practices.

EHM has 3 distinct components:

  1. Present Value (PV) past overcharges due to premiums that exceed a fair premium (SDN);
  2. PV loss due to future premiums that exceed SDN;
  3. Average PV loss due to forced lapsing; In a rate filing, carriers frequently express what percent of policyholders are expected to abandon their policies.  Lack of trust of the so-called insurance relationship is a leading cause of lapsing.

A fair premium (SDN) acknowledges carriers’ contractual right to reprice LTCI premiums given claims history and projection. However, SDN does not acknowledge the industry has the right to chargeback existing policyholders for past underpricing. In 2018, a group of actuaries seem to have admitted what was going on, a little late in the day.

For component #2, it is important to differentiate which premium is being compared to the SDN. Is it the current premium that a regulator has already granted? Or, is it the premium we expect will ultimately be granted because the Book is still underpriced by industry methods? For the latter, we use a Shock Lapse Premium (SLAP).  SLAP is an instant repricing of the Book to meet its minimum statutory lifetime loss ratio (60% in CT).

Case of Economic Harm Modeling

This is a case of nearly 4,000 policyholders in CT. The Book’s SDN is 2.94x original premium in the aggregate. We estimate an average loss of $13.0K due to loss components #2 above as premiums will be stepped up (4.13x original) starting in 2021. This will result in a 29% chargeback. The carrier has indicated a forced lapse rate of 2.3%. Given the average contract value of $60,572, component #3 loss is $1,393 for a total average expected loss of $14.4K. Across the state, the net economic loss to seniors is approximately $56 million. If the Book were repriced to its SLAP of 15.75x original, the loss would grow to $101K per policyholder. The future does not look particularly bright for policyholders in this book.

This Book does not yet have a component #1 loss. Others do. We believe that component #1 loss will increase rather dramatically for all legacy LTCI products.

Other stakeholders

Here is a list of all states offering tax incentives for LTCI. If a premium contains pricing elements that are not in fact fair premium, a portion of the tax credits or deductions given are for a different purpose than what might have been intended. Who gains and who loses? More work on this question is needed.

We hope to report on other cases as our research evolves.


8-K LTCI Filing Gambit

LTCI SEC filings

What is the process when an LTCI carrier is found to be under-reserved? The 8-K filing offers teaching points of the LTCI Gambit. Here is a recent one from UNUM.

“On May 4, 2020, the Company announced that in connection with a financial  examination of its Maine domiciled Unum Life Insurance Company of America (“Unum America”) subsidiary, which is expected to close at the end of the second quarter, the Maine Bureau of Insurance (the “MBOI”) has concluded that Unum America’s long-term care statutory reserves are deficient by $2.1 billion as of December 31, 2018. As permitted by the MBOI, Unum America will phase in the additional statutory reserves over seven years beginning with year-end 2020 and ending with year-end 2026. The 2020 phase-in amount is estimated to be between $200 million and $250 million. This strengthening will be accomplished by the company’s actuaries incorporating explicitly agreed upon margins into its existing assumptions for annual statutory reserve adequacy testing. These actions will add margin to Unum America’s best estimate assumptions. The Company plans to fund the additional statutory reserves with expected cash flows. The Company’s long-term care reserves and financial results reported under generally accepted accounting principles are not affected by the MBOI’s examination conclusion.

The Company has suspended its current share repurchase authorization and will not repurchase shares in 2020. Additionally, the Company intends to continue to pay its common stock dividend at the current rate.

How much was the share repurchase program costing over the past 3 years? This answer can be found in a recent 10-K Cash Flow from Operating Activities – about $1.2 billion. Add dividends for $0.6 billion bringing the total up to $1.8 billion over 3 years.

Proposed Carrier Best Practices

What do we propose as the best practice for carriers?

  • First, get into an under-reserved state ($2.1 billion will do just fine) by instituting a share buyback program to boost share prices; offer rich dividends too;
  • Be found to be in an under-reserved status by regulators;
  • Admit to the under-reserved state and embark on a multi-year plan to close the reserve gap;
  • Keep chaos at a minimum by 1 change at a time – i.e. maintain the dividend;
  • Institute a cash flow program to pay into reserves, by charging your policyholders; have the regulators enthusiastically support the cash flow program by passing rate increases & crying the insolvency wolf;
  • When the all-clear signal is given, resume the share buyback program;
  • Hope nobody notices.

That’s a plan!

Group CT Partnership +299% filing

Here’s a good start seen in the filing MEAM-131987416 (Policy Form GMB96/CT, inception year 1997) affecting 1,268 CT state workers. Med America, the reinsurer states, “although a substantially larger increase would be needed to return this policy form to its expected loss ratio, the company is limiting its premium rate increase to 299%” (to a lifetime loss ratio of 94%). Since this is the first rate increase ever, the CT DOI grants +50% this time out. By: (1.) the reinsurer not asking for the full increase (which would have brought premiums to 4x original), and (2.) by CT DOI being stingy, the Catch Up damage is significantly worse for policyholders. We show, by our methods, that policyholders of GMB96/CT could in theory be charged 9x original premium. This assumes carriers are permitted to chargeback existing policyholders for underpricing the past 23 years. On the other hand, we believe fair premium is 2.16x without chargebacks.

Is there a problem? Hard to say. It all seems in keeping with the plan to enable UNM to resume their stock repurchases.

Update June 29, 2020

To the CT DOI in May, I inquired whether the DOI reviews the type of UNUM practice in adjudicating rate filings. Asked, not answered (“what happened to UNUM’s response”?), the short of it is “no”. Previously, the CT DOI in public forum has asserted policyholders have an obligation to pay higher (exorbitant) rates to ensure LTCI carrier(s) do not go insolvent. In CT, LTCI carriers can count on the regulator’s support for future rate increases if their reserves are depleted due to share buybacks or excess payment of dividends. So why not? This practice appears to have been green-lighted.

Skochin Settlement

In recent days, we have seen more than usual activity to our Genworth (GNW) posts. We assume this pertains to the Skochin settlement. Here are just a few of our thoughts now with more as the situation develops. Be advised that whatever your final decision on the settlement, that is between and your advisor. We start by commenting on two key points of the original case.

    • Referring to the rather stunning points 28 – 29 (where the example used is a projection of original premium of $5,000 to $40,000 by 2024 – 2026), our analytics / metrics show the same 8-fold projected premium. Does this mean we side with the carrier? Absolutely not!
    • The question that is not brought forth in the original case is fundamental cause of this absurdity. We can answer that by saying this is normal for over 150 rate filing cases we have examined. The LTCI industry charges back past losses plus interest to the remaining policyholders in order for the carrier to meet present value lifetime loss ratio of 60%. This guarantees the carrier a 40% profit margin minus SG&A (overhead) expenses. So if they vastly undercharged in the past, the remaining policyholders are here to pick up the tab (incl. somebody else’s) plus interest. Learn more.
    • We also show that, without the chargeback, the pricing should be 2.04x original premium. We assume GNW’s claims expense projections, which some consider fantasy. Some difference though — 2x vs. 8x.
    • We also calculate past overcharges from the difference of holding present policies responsible for past losses vs. not. Applies here.

Why didn’t the case go after a bigger, broader claim!? Small claim, small settlement. Who benefits from a narrow claim?

Unhappy Campers

Now (May 13, 2020) comes events surrounding the settlement. What’s most interesting is what some of the Unhappy Campers think of unambiguous and ambiguous aspects of the settlement starting on page 64. The Campers raise some good points that we wholeheartedly agree with.

Fitch Downgrade

Adding significant complexity to policyholder decision making is Fitch Rating’s recent downgrade of the Insurer Financial Strength (IFS) ratings of Genworth Life Insurance Company (GLIC) and Genworth Life Insurance Company of New York (GLICNY) to ‘CCC’ from ‘CCC+’ on May 4th, 2020:

The downgrade reflect Fitch’s concern regarding the impact of the economic fallout on the Genworth Life companies’ already weak balance sheet fundamentals and financial performance over the next one or two years. Today’s rating action also reflects increased concern over the adequacy of GLIC and GLICNY’s long-term care reserves due to the decline in interest rates…

The Evolving Outlook reflects the pending acquisition of the Genworth life companies’ parent, Genworth Financial, Inc. (Genworth), by China Oceanwide Holdings Group Co. Ltd. (Oceanwide). Comment: Is the current political climate such that this deal will be consummated?

Today’s rating actions follows Fitch’s recent action to revise the rating outlook on the U.S. life insurance industry to negative. Fitch’s primary concerns over the near term include the decline in interest rates, equity market declines, increased credit losses, rating migration and elevated mortality. Longer term concerns include the potential for a prolonged, steep macroeconomic downturn, changes in policyholder behavior and low interest rates that persist for multiple years.

On a related matter that applies to this case and other LTCI, we are focused on LTCI Economic Harm Modeling. This effort is a natural extension and application to our Oct. 2019 research paper.  This paper seems to have taken on a predictive quality as was our intention. Specifically, it was accurate in predicting within a few months Case 3: “A Disaster Waiting To Happen”.

What is Economic Harm Modeling?

EHM is a mathematical framework to understand potential loss exposure for LTCI consumers. One beauty of the model we are developing is that we need not get into the actuarial weeds. Presently, it is functioning model that talks about $ amounts. However, we want to take another go around before publication.

What is an Individual Case Model (ICM)?

By contrast, this type of model enables a client to make the best, or at least good, choice based on their particular circumstances (aka Individual Case Basis or ICB). In the GNW settlement, there are numerous choices available which will cause confusion to a client, almost by design. We know of no ICB  commercial model. Our firm has one but we are concentrating on EHM in the belief it is broadly more constructive for LTCI consumers at this time. Having an ICB product means that we are in the actuarial weeds and benefit from having been in the research end of Health Care since initiating coverage in 2009.

Our firm has done limited ICBs for concerned GNW clients who are not part of the settlement. Client decision making is complex because of the fog, but we can at least clear some of the fog away.

If a GNW class member would like an ICB assessment of their settlement offer, we would offer our assistance on a pilot basis. However, being a boutique R&D firm whose mission does not include retail services, we must limit up to 5 such pilots. If interested, consider registering as it provides essential contact info and sets up for an account (no charge / no credit info).

If one is a GNW policyholder, but not part of the settlement, our work in EHM may tide you over.

Discriminatory Integrated Filings

Discriminatory integrated filings may be a way of your LTCI mess, but only if you are part of an integrated filing and only if you are hardy.

Recently, I have been asked about the fairness of integrated filings. Transamerica, an LTCI carrier with 50 books, has used an integrated filing (IF) approach since 2009.

What is an integrated filing (IF)?

Nearly all LTCI carriers have more than 1 Book of business. An IF combines several books into one logical filing. By that, we mean the Master Exhibit values represent the sum of premiums & claims across all books. The lifetime loss ratio that drives rate adjudication is calculated accordingly. To be sure, other filings combine books under one cover (SERFF-ID) but the books are logically separate.

Transamerica and Brighthouse are known to use IF. Other carriers may use IF in the future.

Administrative efficiency and lower cost is one reason to use IF. The question I was asked is whether it is discriminatory. Most people would intuitively answer this question “Yes”! Is there a data science technique to answer this question?

First, if every filing for a rate increase has been integrated for over a decade as in Transamerica’s case, the task would be to somehow disassemble the filing into its 50 component books. This is a monumental, mind boggling task. The carriers hold the cards by not releasing details.

Brighthouse in the past two years evolved to an IF from 13 book filings. Key conclusions from a research experiment looking at this case reveal:

    • Books that have a low ratio of current rate : SDN (fair rate) just prior to integration are treated very favorably, having escaped a high potential premium had they stayed on their own. These tend to be underperforming books that we sometimes refer to a trash.
    • By contrast, books that have a high ratio just prior to integration are treated very unfavorably. Why is this? They are subsidizing the trash to the degree of a trash’s weight.

An integrated filing is a zero sum game for consumers. Unless all (13 or 50) books perform the same, you have winners & losers. If you are a winner, do not rock the boat. If you are a big loser, consider rocking the boat.

Integrated filings are discriminatory

How you do know if you are a loser or winner? Without any data we have a rule-of-thumb: If you had reason to believe you were winning before, you probably just lost. Vice versa. Rule-of-thumbs lack certainty. If certainty is necessary, the required data together with a computational task is required to derive SDN to be conclusive on discrimination and financial loss. We do that for stakeholders when there is an incentive.

Here is where it can get nasty

What about the questioner who wants clarity. Have they been on the losing end subsidizing the trash? What is the loss in hard dollar terms? I say to them, you need to acquire the most recent filing of all 50 books. One could do the same experiment as was done for Brighthouse.

Just ask for the 50 filings. Say you have a right to know. You know that I am kidding, right!?

Another approach is to ask the carrier (or DOI) to disassemble your policy history to determine you have been treated fairly. What is their criteria that your book has not been unfairly treated? Shouldn’t this be stated in the filing already?

Simplest approach: If the carrier (or DOI) is unable or unwilling to track it through, then you may have a claim that your Original Policy Assumption (Methodological Quirk) stands. What would that mean exactly? OPA’s were designed to meet minimum statutory loss ratio. You are back to square 1.0 x your original premium. Forever.

Wouldn’t mind hearing an intelligent rebuttal or two as this is untested.

Final thought: Brighthouse is not the subject of this post. It is the perfect case to respond to a policyholder’s inquiry.

Another LTCI Methodological Quirk

An LTCI filing that includes original assumptions in the Master Exhibit reveals yet another methodological problem in rate adjudication with long-term consequences to policyholders.

This post describes another example of:

Risk Based Horizon Scanning

We use a 1 page Master Exhibit 2017 SERFF-ID MULF-130960272, a 666 page filing covering several books.

The exhibit contains three 3-column sets:

      • Original Pricing Assumptions (OPA) in the 1st 3-column set;
      • The experience / projection before EP(b)(b) the requested rate increase as the 2nd column set; and
      • The experience / projection after EP(a) the requested rate increase as the 3rd column set.

Each 3-column set includes incurred claims, premiums, and loss ratio (claims / premiums) for each year of the 52 year life (1998-2040). The summary includes the lifetime loss ratio (LLR).

OPA is the initial justification for pricing a policy in the beginning of a book’s life. Consider OPA random fiction.

Note the yearly loss ratio (LR) comparisons of OPA vs. either of the two last 3-column sets (EPs). OPA’s LR is always greater except for 2007 – 2008.  Despite this, OPA’s LLR (0.67) is lower than EF(b) (0.92) and EF(a) (0.87). This seems quirky. It would be natural to ask of this riddle…

How Could This Be?

Observe EP premiums & claims are well above OPA starting around 2000. Could the carrier have added books along the way, but continue to use the same OPA? It appears so!

Answer to the riddle: Since EP premiums & claims >> OPA in the weighty years when annual loss ratios exceeds 90% (e.g. years 2005 & beyond), these later years dominate the LLR calculation.

Shouldn’t the industry (carrier, regulators) have known by 2007 that OPA was far off given the wide premium & claim variance between OPA and EP?

What difference does this make?

Refer to the table below. This is the framework used by some regulators to judge how much of an increase is warranted, if any. A comparison is made between actual v. expected loss ratios, the latter from the dated and obsolete OPA!

Year Earned Premium (billions) Incurred Claims (billions) (1) Actual (LLR) (2) Expect (LLR) (1)/(2)
1991-2013 $1.572 $1.259 80.16% 66.53% 1.20
2014 $0.055 $0.109 198.80% 266.66% 0.75
2015 $0.055 $0.116 211.47% 298.71% 0.71
Total $1.682 $1.486 88.33% 71.31% 1.24

Using the invalid expected LR(2) for the stated periods (1991-2013, 2014, 2015) meant the carrier’s rate requests had to meet a secondary test in addition to the primary minimum statutory (MLLF of 0.60), thus causing a delay in rate increases. Such delays exascerbate the well-known Catch Up problem where future increases must make up for lost time. Policyholders presently own this liability though we make the case that they should not.

My guess is that the LTCI industry is not even aware of this problem or its consequences.

Other cases (e.g. AEGB-131679838) use an OPA that has the opposite problem. Here, we see OPA LR(s) consistently under EP LRs and OPA. This means the secondary test would not block rate request increases that would be otherwise blocked.

Rate grants to your policy are sensitive to whatever fictional OPA created over two decades ago.

Final Note (MULF-130960272): We used our app to review OPA and EP key metrics. The Step Down (SDN) for the OPA is 1.16>1.0 since the OPA had an LLR of 0.67 as opposed to the 0.6 MLLR. By contrast, the EP filings have an SDN of 1.73 reflecting a rise in the claims-to-premium ratio compared to OP. The Step Up (SUP) are 12.5 and 14.5, respectively for OPA v. EP. In either case, both books are Catch Up sensitive. Rate increases will continue as they have since the first in 2009, now a total of five. The EP increases were not granted in a timely fashion, due both to a dozing industry and secondary test described above. The current premium  is 2.36x the base aggregate premium (1.0), +26% above the EP SDN (1.73). Policyholders are currently paying a 26% subsidy of their current annual premium to pay for past losses.